As developer Dudley Webb seeks design approval this week for a scaled-down version of CentrePointe, independent experts say it remains nearly impossible to secure financing for a large luxury hotel-condominium project.
Even if money were available, they say, Lexington has no need for more hotel rooms downtown, and the city's condominium market remains stagnant.
Financing is "very difficult because, around the country, we have many projects in default," said Don Mullineaux, professor of the DuPont endowed chair in banking and financial services at the University of Kentucky. "That makes banks very reluctant to look at new projects when ones they own are under water in terms of the borrower being able to pay them back."
The original $250 million CentrePointe design, unveiled in March 2008, showed a 40-story tower with 91 luxury condominiums, a restaurant, retail and office space, and a 237-room J.W. Marriott Hotel.
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The new $200 million CentrePointe design shows a 25-story building with 14 small apartments and 49 "more traditional" condominiums, a 237-room J.W. Marriott, a spa and 53,000 square feet of office space.
The Courthouse Area Design Review Board will consider the new CentrePointe application at 2 p.m. Wednesday in council chambers of the Government Center. Webb's permit to build the original proposal on the block bounded by Main, Vine, Upper and Limestone expires July 8.
Webb publicly acknowledged for the first time in a June 9 letter to the design review board that CentrePointe's financing had fallen through.
In April 2009, Lexington officials were notified that an unidentified European investor who was to finance CentrePointe had died in fall 2008, leaving no will. The investor's heirs have since refused to finance the project.
The block, which once housed several buildings with historical or architectural significance, was seeded in grass last summer and enclosed by black farm fencing.
Webb said earlier this month that he is seeking "more conventional financing" for the new design and that "progress is being made." He did not return calls seeking comment for this story.
Default rates remain high
Mullineaux said construction and development loans are "the hardest kind of loan to get today" because banks continue to see a high rate of defaults on commercial real estate.
Nationally, about 17 percent of those loans are more than 90 days past due, according to the Federal Deposit Insurance Corp.'s quarterly banking report in March. In the final quarter of 2000, the delinquency rate was 0.81 percent.
The failure rate — when banks remove the loans from their books and take a loss — is 5.5 percent in 2010, compared to 0.05 percent in 2000, Mullineaux said.
Even if a bank is willing to provide construction financing, it wants to know that somebody else will provide follow-up financing to pay off the bank as the project is completed, he said.
Banks are not interested in permanently financing a $200 million project, he said.
"They could wait around and fund the entire project. But that means filling up all the condos, then relying on the cash flow that comes from sales and renting hotel rooms," he said. "That's pretty risky."
Without a bank loan, the only other option to finance such a project is to attract an institutional investor such as a pension fund, an insurance company or a private equity fund, Mullineaux said.
"Quite frankly, there are a lot of investors sitting on a lot of cash, and they could do it," he said.
But as long as uncertainty remains about whether developers can sell the condos and fill up the hotel rooms, "they're not going to be willing to provide the money," he said.
Vacant in Lexington
Right now, there is no need for more downtown hotel rooms, said Dennis Johnston, vice president of sales for Lexington's Convention and Visitors Bureau.
On average, hotel occupancy citywide is 60 percent, indicating a relatively weak market, he said.
Conventions and meetings, not leisure travel, drive the downtown hotel business, Johnston said. Lexington Center convention business, while strong, faces restrictions because of the center's size, until the University of Kentucky builds a new arena to replace the 34-year-old Rupp Arena, said Bill Owen, president and chief executive of Lexington Center Corp.
"In terms of facilities, we are at capacity," Owen said.
Conventions, meetings and banquets at the Lexington Center have increased significantly since the center added 70,000 square feet in 2005. The center hosted 116 events in 2000, compared with 244 events in 2009, more than double the earlier number.
In 2008, UK announced its intention to build a new arena, upgrade Commonwealth Stadium and develop a baseball stadium. But UK spokesman Jimmy Stanton said Thursday that "there are no concrete plans or time lines for any of these projects at this time."
If a new arena is built, Lexington Center would carve up Rupp Arena to add more convention space and a performance arts hall.
Until then, "a new hotel is just going to steal business from hotels we already have," said Kristi Yahn, director of sales for Hilton Suites at Lexington Green.
In any case, Lexington is not a destination for high-end conventions, "so a luxury hotel probably is not the answer" whenever more rooms are needed in the future, Johnston said.
'That game's over'
It's been all but impossible to finance a stand-alone hotel since 2001, when the Sept. 11 terrorist attacks pushed the industry into deep decline "quicker than anyone would have imagined," said Rod Petrik, lodging analyst for Stifel Nicolaus & Co., in Baltimore.
Hotel construction financing dried up, but the housing market remained strong, and financing was available for condominiums. Developers began combining their high-end hotel projects with condominiums, "because you could get construction financing if they had condos," Petrik said.
"As you sold the condos, you paid down your construction loan," he said. Once the condos were sold, "you needed very little money to finance the hotel."
Today, "that game's over," Petrik said. "There's no financing for hotels. There's no financing for condos."
In the swank Buckhead section of Atlanta, Ritz-Carlton Residences is a sleek 34-story tower with office space and 129 one- and two-bedroom luxury condos and two-story penthouses. "Brand new. And it's completely empty," Petrik said. Ritz-Carlton is owned by Marriott.
Atlanta real estate agent Kristen Butler said the condos are beautiful, but "I've never showed one."
In Miami, Mullineaux said construction has halted on dozens of condo buildings.
When construction on these projects will resume is anybody's guess, Mullineaux said. "Will they sit there for 10 years before somebody sees that the market is back enough to continue? Nobody knows. People have just walked away from projects."
Condo sales 'mediocre'
In Lexington, condominium sales are "mediocre," although there is "insane" demand to rent downtown condos, developer Phil Holoubek said.
At least two condo projects stalled when developers ran out of money.
In 2008, Central Bank foreclosed on The Mark Lofts, a 36-unit condominium project on Woodland Avenue.
In March, Citizens National Bank in Ashland filed a lawsuit against a portion of The 500s on Main, a condo project that opened in 2007 and attracted The Penguin Dueling Piano Bar in 2008.
The bank said it was owed about $1.33 million by Schneider Designs, developer of the project.
Jim McKeighen, a Lexington real estate agent specializing in selling downtown properties, said the prospect of selling expensive condos looks daunting.
There are 75 active residential listings for million-dollar houses in Fayette County, not counting farms, according to the Lexington-Bluegrass Association of Realtors.
Since the first of the year, only five million-dollar houses in the county have sold, said McKeighen, who sells for Turf Town Properties. In 2009, only eight million-dollar residential properties sold.
"That tells me we have over a 10 year supply, and that's just in Fayette County," he said. "If the Webbs are going to put more million-dollar condos on the market, they're not going to sell."